Primary Credit Analyst: Lukas Paul, Frankfurt (49) ;

Transcription

1 Primary Credit Analyst: Lukas Paul, Frankfurt (49) ; Secondary Contact: Thierry Guermann, Stockholm (46) ; Table Of Contents Rationale Outlook Our Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Ratings Score Snapshot Reconciliation Related Criteria And Research APRIL 24,

2 Business Risk: SATISFACTORY Vulnerable Excellent bbb+ bbb+ bbb+ CORPORATE CREDIT RATING Financial Risk: MODEST BBB+/Stable/A-2 Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Satisfactory Leading mobile and fixed broadband operator in Finland, with 40% market share in mobile and 35% in broadband. 4G network with 99% population coverage, supporting the monetization of rising mobile data consumption. Overall stable competitive environment in the three-player Finnish mobile market. More volatile demand for some services in the corporate customer segment. Few opportunities for subscriber growth and structural decline in landline telephony. Very limited scale and geographic diversification. Financial Risk: Modest Conservative financial policy supporting S&P Global Ratings-adjusted debt to EBITDA of no higher than 2.0x. Comparatively modest and manageable capital expenditures. Good free operating cash flow generation of 25%-30% of adjusted debt in our forecast for APRIL 24,

3 Outlook: Stable The stable outlook on Finnish telecommunications service provider Elisa Corp. reflects S&P Global Ratings' expectation that in the next 24 months the company will report organic revenue growth between 0.5% and 2.5%, mainly thanks to higher revenues from mobile and new digital services, and modestly increasing EBITDA margins. We further anticipate that its adjusted debt-to-ebitda and free operating cash flow (FOCF)-to-debt ratios will be no higher than 2x and between 25% and 30%, respectively. Downside scenario We could lower our ratings if Elisa's EBITDA or FOCF weakened, for example because competition caused a pronounced revenue decline or weaker margins. We could also downgrade Elisa if its adjusted debt-to-ebitda ratio remained above 2x or FOCF to debt decreased to below 20% for a prolonged period, for instance due to debt-financed acquisitions. Upside scenario Rating upside is remote given Elisa's limited scale and diversification and its financial policy, under which it targets net debt to EBITDA of 1.5x-2.0x. Our Base-Case Scenario We expect Elisa will deliver modest organic revenue and EBITDA growth in the next two years. Moreover, we think the successful integration of recent acquisitions will bring about additional revenue and cost synergies. Together with our view that Elisa will adhere to its communicated financial policy and our expectation of moderate capex needs, we think this will result in stable S&P Global Ratings-adjusted leverage of below 2x and continued favorable FOCF generation. APRIL 24,

4 Assumptions Organic revenue growth of 0.5%-2.5% in 2017 and 2018, driven particularly by mobile service revenues and new digital services. Flat to slightly increasing adjusted EBITDA margins in , enhanced by high-margin mobile service revenue growth, continued small-scale efficiency measures, synergies from acquisitions, and growing scale of new digital services. Capital expenditures (capex) as a percentage of sales of about 13% in 2017, temporarily higher due to integration capex for Anvia, and receding to 12%-13% in 2018 including spectrum costs. Dividend payments at the higher end of the guidance range of 80%-100% of the previous year's net profit, as of 2018, after about 93% in Key Metrics 2016a 2017f 2018f EBITDA margin* (%) Debt/EBITDA* (x) FFO/debt* (%) FOCF/debt* (%) *Fully S&P Global Ratings adjusted. FFO--Funds from operations. FOCF--Free operating cash flow. a--actual. f--forecast. Company Description Elisa provides fixed and mobile telecommunications services to consumers and corporate customers in Finland. Following the acquisition of Starman, Elisa also offers broadband and TV services in Estonia, in addition to its mobile operations in this market. Along with connectivity services, the company also offers information and communications technology and digital services in adjacent segments, such as information technology (IT) security for enterprise clients or internet protocol television services for consumers. At the end of the first quarter of 2017, Elisa had about 4.7 million mobile subscribers and approximately 1.2 million fixed line subscriptions, including about 594,000 in broadband and 447,000 in cable TV. In 2016, Elisa generated about 63% of revenues and 66% of EBITDA from the provision of services to consumers, and the remainder from its corporate customer business. Business Risk: Satisfactory Our assessment of Elisa's business risk is supported by the company's leading share among the three network operators in the Finnish mobile market, as well as its leading position in fixed broadband services in Finland. As of December 2016, Elisa held a 40% market share in mobile subscriptions, marginally down from 41% one year earlier, based on company data. The acquisition of Anvia in July 2016 helped Elisa to grow its subscriber market share in fixed broadband to about 35% at year-end 2016, compared with about 31% at the end of 2015, according to data by the Finnish telecoms regulator. Elisa is also the second-largest mobile operator in Estonia with a subscriber market share of about 32% at end-2016, and, following the acquisition of cable operator Starman, holds about a 35% market share in pay-tv services and 23% in the fixed broadband market, according to the company's data. We think Elisa benefits from its well-invested 4G network which, per the company's estimates, currently covers 99% of APRIL 24,

5 the Finnish population. In our view, this puts Elisa in the position to capitalize on rising mobile data usage and smartphone penetration. Up-selling to higher speeds contributed to Elisa's strong mobile service revenue growth of about 6% in 2016 and 5.5% in the first quarter of Although we expect competition in the Finnish mobile market to remain intense, we think the risks of a material and sustained deterioration of pricing and average revenues per user remain limited. Similarly, although intense competition exists in certain pockets of fixed broadband markets, overall competitive dynamics are relatively stable, from our perspective. Elisa is upgrading its fixed broadband network on an opportunistic basis, but we believe there is only modest pressure to invest in very expensive network upgrades such as large-scale fiber-to-the-home deployments at this stage, reducing the risk of unanticipated capex peaks. The ability to offer a complete portfolio of mobile, fixed-line and TV services after the combination with Starman incrementally strengthens Elisa's market position in Estonia, in our opinion. Our assessment of Elisa's business risk is constrained by the company's very limited scale and geographic diversification. Elisa's customer and revenue base is relatively small compared with European peers, and its footprint is confined to Finland and Estonia. In addition, we consider the business environment in Elisa's corporate segment as somewhat less favorable, as demand for services remains more susceptible to macroeconomic headwinds and cost cutting efforts of enterprise customers. Moreover, we think that medium- to long-term growth opportunities may be constrained by a high degree of market saturation for mobile subscriptions. As of June 2016, Finland's mobile broadband penetration stood at 147% (subscriptions/population), the highest in the EU and well ahead of second-ranking Denmark with 123%, according to data from the European Commission. Our Base-Case Operating Scenario We base our revenue forecast for Elisa on continued healthy mobile service revenue growth in , coupled with expansion in new digital services for consumers and corporates. At the same time, we are expecting to see flattish or modestly decreasing fixed broadband revenues and no change to the secular decline in landline voice services. We are projecting gradual EBITDA margin expansion, in particular from 2018, due to a combination of margin-enhancing mobile service revenue growth, continued cost-cutting, diminishing margin dilution from new services, and synergies from acquisitions. We think that Elisa will continue to upgrade its fixed broadband network to higher speeds and invest in coverage and capacity improvements in mobile, but we consider the risk that Elisa could be forced to significantly step-up network investments, particularly in its fixed network, as moderate. Peer comparison Table 1 Elisa Corp. -- Peer Comparison Industry Sector: Diversified Telecom (Mil. ) Elisa Corp. Telia Company AB TDC A/S Telekom Austria AG Rating as of April 24, 2017 BBB+/Stable/A-2 A-/Negative/A-2 BBB-/Stable/A-3 BBB/Stable/A-2 Fiscal year ended Dec. 31, 2016 Dec. 31, 2016 Dec. 31, 2016 Dec. 31, 2015 Revenues 1, , , , APRIL 24,

6 Table 1 Elisa Corp. -- Peer Comparison (cont.) Industry Sector: Diversified Telecom (Mil. ) Elisa Corp. Telia Company AB TDC A/S Telekom Austria AG EBITDA , , ,300.7 Funds from operations (FFO) , , ,058.4 Net income from cont. oper , Cash flow from operations , ,057.5 Capital expenditures , Free operating cash flow Discretionary cash flow 78.2 (651.5) Cash and short-term investments , Debt 1, , , ,570.2 Equity , , ,126.0 Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) 6.3 (8.0) Financial Risk: Modest Key factors in our assessment of Elisa's financial risk are the company's leverage policy and its solid FOCF generation. Management remains committed to keeping net debt to EBITDA, as per the company's definition, between 1.5x and 2.0x, which translates into adjusted debt to EBITDA of no more than 2.0x in our forecast. We think that Elisa may continue to pursue smaller acquisitions, for example, to participate in the consolidation of the Finnish fixed-line telecom market or in the IT and digital services sector. Although debt-funded acquisitions could temporarily weaken the company's credit metrics, we expect that it would aim to restore leverage to its targeted band within 12 months. Furthermore, we regard Elisa's capex pattern as fairly stable and predictable, with a low risk of unexpected and significant deviations from its guidance of a capex-to-sales ratio of 13% in 2017 and no more than 12% in the medium term. This supports good FOCF generation that compares favorably with other peers in the European telecom sector, in our opinion. APRIL 24,

7 Our Base-Case Cash Flow And Capital Structure Scenario Dividend payments at the higher end of the company's guidance range of 80%-100% of the previous year's net profit, from 2018 onward, after about 93% in Some spending on small mergers and acquisitions, for example in IT services, or for local fixed-line operators. Adjusted debt to EBITDA below 2.0x, in the absence of material acquisitions, and reported FOCF of more than 260 million a year. Continued use of commercial paper of up to 250 million a year. Financial summary Table 2 Elisa Corp. -- Financial Summary Industry Sector: Diversified Telecom --Fiscal year ended Dec (Mil. ) Revenues 1, , , , ,553.4 EBITDA Funds from operations (FFO) Net income from continuing operations Cash flow from operations Capital expenditures Free operating cash flow Discretionary cash flow (10.2) Cash and short-term investments Debt 1, , , , Equity Adjusted ratios EBITDA margin (%) Return on capital (%) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) (1.1) Liquidity: Adequate The short-term rating is 'A-2'. We assess Elisa's liquidity as adequate because we expect its sources of liquidity will cover uses by more than 1.2x over the 12 months started April 1, We note that a significant portion of Elisa's APRIL 24,

8 funding frequently consists of commercial paper with terms shorter than 12 months. We think that Elisa has solid relationships with banks and benefits from a generally satisfactory standing in credit markets. Principal Liquidity Sources As of April 1, 2017, Elisa's principal liquidity sources over the ensuing 12 months include: Cash balances of about 216 million. An undrawn revolving credit facility (RCF) of 130 million maturing in June 2021, and 90 availability under the company's 170 million RCF due June Funds from operations of 510 million- 540 million. 44 inflows from the sale of Comptel shares. Principal Liquidity Uses For the same period, principal liquidity uses include: Debt amortization of about 205 million, including commercial paper maturities of 193 million. Capex of 220 million- 240 million. Dividend payments of about 240 million. 28 million of outflows for the acquisition of Santa Monica Networks. Intrayear working capital needs of up to 10 million. Debt maturities* As of April 1, 2017: 2017: 5 million 2018: 59 million 2019: 180 million 2021: 300 million 2023: 150 million 2024: 300 million *Excluding finance leases and RCFs. Covenant Analysis Elisa must comply with minimum equity ratio covenants under the terms of its revolving credit and bank loan facilities. We forecast sufficient headroom of more than 20% under these covenants in the next 24 months. Ratings Score Snapshot Corporate Credit Rating BBB+/Stable/A-2 Business risk: Satisfactory Country risk: Low Industry risk: Intermediate APRIL 24,

9 Competitive position: Satisfactory Financial risk: Modest Cash flow/leverage: Modest Anchor: bbb+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Adequate (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Reconciliation We treat all of Elisa's consolidated cash balances as surplus cash as virtually all of it is accessible without restrictions. We add to debt about 29 million of liabilities for remaining instalments due for 800 megahertz spectrum acquired in 2013 and 700 megahertz spectrum acquired in Table 3 Reconciliation Of Elisa Corp. Reported Amounts With S&P Global Ratings Adjusted Amounts (Mil. ) Elisa Corp. reported amounts Debt Shareholders' equity EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Capital expenditures Reported 1, S&P Global Ratings' adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) (22.4) (60.1) Operating leases Postretirement benefit obligations/deferred compensation (0.1) -- Surplus cash (44.5) Capitalized development costs Share-based compensation expense (2.8) (2.8) (2.8) (2.8) APRIL 24,

10 Table 3 Reconciliation Of Elisa Corp. Reported Amounts With S&P Global Ratings Adjusted Amounts (Mil. ) (cont.) Dividends received from equity investments Non-operating income (expense) Non-controlling interest/minority interest Debt - Accrued interest not included in reported debt Debt - Contingent considerations Debt - Spectrum EBITDA - Gain/(Loss) on disposals of PP&E EBITDA - Business divestments (0.7) (0.7) -- (0.7) (1.1) (1.1) -- (1.1) Total adjustments (49.1) 21.0 (2.8) S& P Global Ratings' adjusted amounts Debt Equity EBITDA EBIT Interest expense Funds from operations Cash flow from operations Capital expenditures Adjusted 1, PP&E--Plant, property, and equipment. Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Rating Each Issue, April 15, APRIL 24,

11 Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of April 24, 2017) Elisa Corp. Corporate Credit Rating Senior Unsecured Corporate Credit Ratings History 18-Mar Mar Oct-2006 BBB+/Stable/A-2 BBB+ BBB+/Stable/A-2 BBB/Positive/A-2 BBB/Stable/A-2 *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com APRIL 24,

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